Image source: Getty Images
I can’t figure out what every stock will be worth in the future. But in the case of Greggs‘ (LSE:GRG) shares, I think I can have a pretty intelligent guess.
I see the FTSE 250 firm as one of the more straightforward companies on the UK stock market. And I mean that as a good thing – the first step to investing is understanding the business.
Where are we now?
According to its most recent update, Greggs has 2,649 stores generating £2.08bn in sales and earnings per share of £1.41. The big question is where will these numbers be five years from now?
The first thing to consider is how many stores the firm will have in 2030. The company’s stated aim is to open 150 new outlets this year and eventually take its store count well above 3,000.
That’s a 28% increase on the current levels, so investors should expect sales growth of at least that. But the next thing to think about is how much each store will generate in revenues?
Like-for-like sales at Greggs have been weak over the last few months. The firm’s put this down to unusual weather conditions, but growth from existing stores has struggled to stay above 2.5%.
As a result, my expectation is for like-for-like annual sales growth of around 3%. Since the company’s share count has been stable over the last 10 years, that leaves the question of margins.
Inflation is a potential risk here, but Greggs has managed to protect its margins well in the past while offering value to customers. So I’m going to assume it will continue to do this in the future.
Valuation
Those are what analysts might call my ‘base case’ assumptions. Things could go better or worse on just about any front, but this is what I see as most likely.
On this basis, revenues should reach £2.94bn in the next five years and earnings per share should make it up to £2. The next thing to consider is what investors might be prepared to pay for this?
I think there’s no question growth’s going to be lower in the future than it has been. And the price-to-earnings (P/E) multiple the stock trades at should reflect this.
Since Greggs aims to increase its dividend each year in line with earnings growth, I’ll assume this continues. This would take the dividend per share up to 98p.
Five years from now, I think investors might look for a 4% dividend yield from the stock. And that implies a share price of £24.50, which is 57% above the current level of the stock.
Based on these assumptions, a £10,000 investment in Greggs shares today could increase by 9.5% a year for the next five years to reach £15,675. And there’s also a dividend with a 4.5% yield to factor in.
A buying opportunity?
I don’t think a lot has to go right for Greggs shares to be worth a lot more in 2030 than they are right now. But as the company’s been demonstrating lately, there’s plenty that can go wrong.
Nonetheless, I think the potential return on offer means there’s a margin of safety with the stock at the moment. And on that basis, I think it’s worth considering.
